This YouTube video is reporting that China’s stock market collapse has now wiped out $6 TRILLION. I wonder how low international oil prices will go now? If it plunges down to $40/barrel, that will change geopolitical situations, as only a few countries such as Saudi Arabia will be able to profitably produce oil at those prices. Any thoughts, Peter, on what would be the consequences for Iran, Russia, Venezuela, etc.? Speculation at this point, sure, but I always love to hear your economic wisdom...
While there has been a lot of speculation about what will happen in oil pricing both as a result of China's economic woes and the tensions in the Middle East, the trend line is far more volatile and at the same time more muted than these narratives tend to suggest.
After war broke out in Ukraine, there was rampant speculation of sustained oil prices above $100/bbl--that did not happen. Indeed, low market prices were a principal factor in the G7/EU oil sanctions on Russia holding up for the number of months that they did.
As for Saudi Arabia, even that country needs oil prices at around $80/bbl in order to sustain its oil economy. As a result of their production cuts not being able to sustain oil prices in the long term, Saudi Arabia's oil sector collapse by around 17% in 3Q 2023 alone.
Which means that $40/bbl is probably not sustainable over the long term, or even the medium term. Energy demand might be soft, but it is not zero, and there is a floor price for oil below which demand pressures will prevent further price erosion. Lately that floor seems to be around $78/bbl for Brent Crude and $74/bbl for West Texas Intermediate.
Depending on how the global economic situation unfolds, we might see that floor price drift down to $70 for Brent and $65 for West Texas Intermediate, but that is an extreme projection and presumes significant global economic contraction. If oil prices go below that we're no longer talking economic contraction but global economic collapse--at that point all the narratives no longer matter, because we will be on the other side of an economic singularity and nobody knows what will happen then.
I doubt anyone has any reliable details about derivatives. Derivatives are the ultimate dark market, with next to no real transparency and no reliable pricing mechanisms for public scrutiny.
In 2022, the level of derivatives on the radar of the US Office of the Comptroller was around $200 TRILLION. The notional value of all derivatives globally was guesstimated at over $1 QUADRILLION.
At that time, the M2 Money Supply was at "just" $21 Trillion.
If there is a meltdown in the derivatives markets similar to what happened in 2007-2008, the fact that the market is multiple orders of magnitude larger today than in 2007 means the economic chaos will be worse.
China's shadow banking market is equally dark and lacking in transparency, and comprises a significant amount of overall Chinese debt. If China's economic woes translate into a cash crunch and liquidity crisis among the shadow banks, that will be a financial earthquake not unlike a derivatives market collapse.
We've already seen just how volatile derivatives can be just in the past few years. In September 2022, the Bank of England felt compelled to intervene in British Gilt markets because the rises in yields were forcing mass liquidations at British pension plans.
At the time, the BoE felt it was facing the imminent collapse of virtually every pension plan within the UK economy, and it took drastic measures to stabilize bond markets.
We are definitely living in those interesting times!
(Trivia note: while the phrase/curse "May you live in interesting times" is widely believed to be of Chinese origin, that attribution is entirely apocryphal and the best extant sources trace the saying back to British diplomats during the interwar period of the 1920s and 1930s.
https://youtu.be/cFBFHxRFUQA?si=gZA5Oydm3kh0t9gd
This YouTube video is reporting that China’s stock market collapse has now wiped out $6 TRILLION. I wonder how low international oil prices will go now? If it plunges down to $40/barrel, that will change geopolitical situations, as only a few countries such as Saudi Arabia will be able to profitably produce oil at those prices. Any thoughts, Peter, on what would be the consequences for Iran, Russia, Venezuela, etc.? Speculation at this point, sure, but I always love to hear your economic wisdom...
The nice thing about oil prices especially is that we can see those shift in real time.
https://www.barchart.com/shared-chart/CBN24?chart_url=i_1707414292_1375524766&page_url=%2Ffutures%2Fquotes%2FCBN24%2Finteractive-chart%3Fid%3D8171973
While there has been a lot of speculation about what will happen in oil pricing both as a result of China's economic woes and the tensions in the Middle East, the trend line is far more volatile and at the same time more muted than these narratives tend to suggest.
After war broke out in Ukraine, there was rampant speculation of sustained oil prices above $100/bbl--that did not happen. Indeed, low market prices were a principal factor in the G7/EU oil sanctions on Russia holding up for the number of months that they did.
As for Saudi Arabia, even that country needs oil prices at around $80/bbl in order to sustain its oil economy. As a result of their production cuts not being able to sustain oil prices in the long term, Saudi Arabia's oil sector collapse by around 17% in 3Q 2023 alone.
Which means that $40/bbl is probably not sustainable over the long term, or even the medium term. Energy demand might be soft, but it is not zero, and there is a floor price for oil below which demand pressures will prevent further price erosion. Lately that floor seems to be around $78/bbl for Brent Crude and $74/bbl for West Texas Intermediate.
Depending on how the global economic situation unfolds, we might see that floor price drift down to $70 for Brent and $65 for West Texas Intermediate, but that is an extreme projection and presumes significant global economic contraction. If oil prices go below that we're no longer talking economic contraction but global economic collapse--at that point all the narratives no longer matter, because we will be on the other side of an economic singularity and nobody knows what will happen then.
Wow - ‘economic singularity’. Scary times, but thank you for all of this excellent data, Peter.
One other question: the video talks briefly about ‘snowball derivatives’, which sound pretty volatile. Do you know any more details about them?
I doubt anyone has any reliable details about derivatives. Derivatives are the ultimate dark market, with next to no real transparency and no reliable pricing mechanisms for public scrutiny.
In 2022, the level of derivatives on the radar of the US Office of the Comptroller was around $200 TRILLION. The notional value of all derivatives globally was guesstimated at over $1 QUADRILLION.
https://newsletter.allfactsmatter.us/p/powells-paradox-curing-inflation
At that time, the M2 Money Supply was at "just" $21 Trillion.
If there is a meltdown in the derivatives markets similar to what happened in 2007-2008, the fact that the market is multiple orders of magnitude larger today than in 2007 means the economic chaos will be worse.
China's shadow banking market is equally dark and lacking in transparency, and comprises a significant amount of overall Chinese debt. If China's economic woes translate into a cash crunch and liquidity crisis among the shadow banks, that will be a financial earthquake not unlike a derivatives market collapse.
We've already seen just how volatile derivatives can be just in the past few years. In September 2022, the Bank of England felt compelled to intervene in British Gilt markets because the rises in yields were forcing mass liquidations at British pension plans.
https://newsletter.allfactsmatter.us/p/the-breaking-begins-boe-intervention
At the time, the BoE felt it was facing the imminent collapse of virtually every pension plan within the UK economy, and it took drastic measures to stabilize bond markets.
Good heavens, Peter. That’s about the most frightening paragraph concerning economics that I’ve ever read! It makes me want to hide under my bed.
Chinese New Year - “May you live in interesting times”...
We are definitely living in those interesting times!
(Trivia note: while the phrase/curse "May you live in interesting times" is widely believed to be of Chinese origin, that attribution is entirely apocryphal and the best extant sources trace the saying back to British diplomats during the interwar period of the 1920s and 1930s.
https://www.phrases.org.uk/meanings/may-you-live-in-interesting-times.html )
Your knowledge base is astounding, Peter! I am continuously impressed by you, on all criteria.